Observations on economics, the academy, the wider world, and things that run on rails.

4.1.16

THE DIRIGISTE IMPULSE DIES HARD.

More from the archives. Here's James Ridgeway, at the time a "Washington correspondent" for Mother Jones. (Perhaps some magazines are more up-front about correspondents serving as editorialists than others.) He's praising then-presidential aspirant Barack Obama for advocating more federal regulation. (That was in a Cooper Union speech. Preaching to the converted, anyone?)

Deregulation has been the mantra on both sides of the aisle since the late 1960s. Long gone are Democrats like Michigan’s Phil Hart who, as chair of the Senate Antitrust Subcommittee, held hearings on the concentration of economic power in the United States, and proposed expanded government regulation of everything from the oil and auto industries to pharmaceuticals to professional sports. Hart believed that because wealth and power were concentrated in the hands of such a small number of corporations, the market economy had become no more than a facade. In this context, what would bring about lower prices and greater productivity and innovation was more government intervention and regulation, not less.

Aggregate concentration comes and goes as a policy issue, but perhaps globalization and increased competition, market-by-market, also matters.

Hart got a Senate building named after him, but his warnings about the threat of unbridled corporate power and consolidation went unheeded. Instead, the rush to deregulation began, first in the transportation sector. Efforts begun under Richard Nixon and Gerald Ford came to fruition under Jimmy Carter, who hired deregulation guru Alfred E. Kahn to head the Civil Aeronautics Board, the widely loathed agency responsible for regulating the airline industry. Senator Ted Kennedy and his then aide, future Supreme Court Justice Stephen Breyer, embraced deregulation as a consumer issue, and with their support, Kahn quickly worked his way out of a job: The 1978 Airline Deregulation Act dissolved the CAB and removed most regulation of commercial airlines. Carter also signed into law bills deregulating the railroads and the trucking industry.

You could argue that transportation deregulation has been a wash-replacing a system of bureaucratic incompetence with one of profit-seeking negligence, and exchanging safety for lower prices. The same cannot be said for the deregulation of the energy sector, notably the natural gas and oil industries under Ronald Reagan, and the electric utilities under George H.W. Bush and Bill Clinton. Left to its own devices, a deregulated energy industry has given us Enron and Exxon-California brownouts and $100 barrels of oil. Deregulation of the telecommunications industry, also under Clinton, reduced the number of major phone service providers to just a handful of multimerged giants.

You could argue, but you would be wrong. Yes, contemporary railroads are as guilty as many other businesses of short-termism and antagonizing customers and calling it "productivity" and yet without the deregulation, would we even have freight railroads? And that oil at $100/bbl? Now Our President is claiming credit for the cheap oil he did much to preclude.

Even more damaging, in light of today’s economic crisis, was the sweeping deregulation of the banking and financial services industries that took place in the 1990s. What makes this enterprise particularly confounding is not only the fact that it took place under a Democratic president with support from a majority of Democrats in Congress, but that it followed so closely on the heels of the savings and loan crisis, which ought to have served as a cautionary tale on the dangers of deregulation in the banking sector. The Depository Institutions Act of 1982, another Reagan initiative, was supposed to “revitalize” the housing industry by freeing up the S&Ls to make more loans. Instead, the regulation rollback led to what economist John Kenneth Galbraith called “the largest and costliest venture in public misfeasance, malfeasance and larceny of all time” as they engaged in a fury of high-risk lending. The collapse that followed cost taxpayers an estimated $150 billion in government bailouts, and contributed to the recession of the early 1990s.

That, dear reader, is an instructive comparison. A house divided against itself ... In this instance, the savings and loans received freedom to lend more widely, the better to be able to raise funds to compete with money market funds that for the first time offered retail savers (you, dear readers, and me) returns on savings comparable with those Donald Trump and the money managers and the Democrat and Republican bundlers were getting. At the same time, the savings and loans held on to their federal deposit insurance. Thus ... put option! Upside gain goes to the account holders, taxpayers hold the down-side risk. Perhaps that was larceny, or perhaps it was irrational exuberance, or perhaps it was bad risk management. Or perhaps not enough regulation was removed.

And we can repeat the story with the end of the Glass-Steagall wall between commercial (meaning retail) and investment (Donald and the bundlers) during the Clinton era. Comparable returns, again, but higher returns go with higher risks, and again, the taxpayers wrote the put option.

In Mr Ridgeway's concluding paragraph, however, is a prediction the outcome of which might have come as a surprise.

For the moment, at least, Obama has staked out the higher ground on this issue. In the end, though, says Sheila Krumholz, executive director of the Center for Responsive Politics, "No matter who becomes our next president, Wall Street will have an indebted friend in the White House." Once the campaign rhetoric fades, the only thing that might bring change on Wall Street is a revolt on Main Street, from Americans who finally cast blame for their lost homes and depleted retirement accounts on its rightful source.

It's likely the Mother Jones readership had something like Occupy in mind. But the Pajamas Media people taking digs at "President Goldman Sachs" and the Tea Party constituency might be that revolt, only by other means.